The EFQM Model as an Exquisite Tool for the Analysis of Business Excellence and Its Use in the Healthcare Industry

*Vladimir Bukvič*

### **Abstract**

The author links together business analysis and business excellence as an ideal that all well-performing organisations wish to achieve while attaining and continuously maintaining superior levels of business performance. He leans on the EFQM model and uses it as an excellent tool for analysing the business of an organisation throughout all the phases defined by traditional business analysis. This entails setting up hypotheses and testing them by applying appropriate measures. After a short introduction, the author makes first a thorough literature review on business excellence in the last two decades. Further, the author presents the basic concepts and elements of the EFQM model of business excellence, with a particular emphasis on the RADAR matrix. He also presents the use of the model for analysing and assessing the business excellence of organisations in the public sector, specifically in the healthcare industry (hospitals). He presents the key attributes (select healthcare aspects) that define the quality of healthcare services for its key participants, i.e., patients and the payers of these services. The author rounds off his paper with a couple of recommendations regarding the identification of strengths and areas for continuous improvement, which he considers as the most important aspect of business excellence analysis.

**Keywords:** business excellence, EFQM model of excellence, financial ratios, quality of healthcare services, business analysis

### **1. Introduction**

We know from economic theory that business analysis is basically a term for the scientific research and explanation of the economic reality, its phenomena, relationships, processes and development tendencies [1]. We also know from logic and science that analysis is actually also a general cognitive method, which itself includes a process, method and goal. The mission of business analysis is primarily related to the economic aspect, as this knowledge should help us improve the economic

performance of a specific organisation. Although it is also defined from an organisational and user point of view, the purpose of business analysis is primarily economically determined. According to Bergant [2], in general, analysis can be defined as the process of getting to know (studying) a certain phenomenon in order to make expedient decisions about it and thereby improve the achievement of one's goal. This means that we analyse with the intention of making a decision, and this decision should be followed by a targeted improvement in performance.

In this paper, we connect the analysis of an organisation's operations with business excellence as the ideal to which all good organisations aspire. Excellent organisations achieve and permanently maintain excellent levels of operations that meet or exceed the expectations of all their stakeholders [3].1

If organisations are to realise the scope in which they are commercially excellent, or how far they are from this desired target, they must approach the analysis of their operations comprehensively. Business analysis begins with observing facts, diagnosing problems, setting hypotheses and testing them logically and practically. This also implies the definition of measures to improve operations, which leads the management of the organisation to plan the organisation's operations. In this paper, we try to follow these stages by analysing business excellence.

First, let us present the concept of business excellence in greater detail and learn about the most widespread tools for analysing or evaluating business excellence. In the following section, we will focus on the use of the EFQM model of excellence and highlight its main features through literature review. A fairly extensive literature review on business excellence is made for the period of the last two decades. The basis of the logic of the EFQM model, i.e., its throughline, is grounded in the connection between the organisation's purpose and strategy and how it is used to create sustainable value for its most important stakeholders in order to achieve exceptional results [3].

We use the RADAR matrix, which is a dynamic evaluation framework and a powerful tool that provides a structured approach to analysing organisational performance. Here we are interested in both the factors, or enablers, and the results of the EFQM model of excellence. When presenting the methodological work, we limit ourselves to only a few select criteria, such as, among enablers, to assets and resource management and, among results, to results related to customers and business results.

In order to more easily understand this approach to the analysis of business excellence and how to analyse the business excellence of a certain business system, we chose the case of healthcare organisation X (a rather big clinical centre) and, due to the limited scope of this contribution, only partially applied to it the abovementioned criteria from the EFQM model.

At the end of the paper, we provide a brief outline of the RADAR matrix as an excellent tool and methodological aid used in the analysis of business excellence and highlight the phase of defining opportunities for improvement as demanding great mental effort, since it should orient the organisation/user in question in the direction of action leading to business excellence.

<sup>1</sup> A stakeholder is a person, group or organisation that has an interest or is directly or indirectly involved in the activities of the organisation and/or in its success and can influence the organisation or is influenced by it. The stakeholders are owners, customers, suppliers, partners, government agencies and representatives of communities and employees [3].

*The EFQM Model as an Exquisite Tool for the Analysis of Business Excellence and Its Use in the… DOI: http://dx.doi.org/10.5772/intechopen.108471*

### **2. What is business excellence: literature review**

Aristotle wrote that excellence is not an individual act, but an attitude. Excellence is a special quality, a characteristic of what counts as excellent. Excellence is much more than performance, if we look at it as a characteristic of an organisation that achieves the desired, expected results [4]. A legal entity that surpasses others in terms of quality is excellent. When judging the excellence of an organisation, it is necessary to start from the point of view of others who are in contact with it in one way or another. The only thing that matters is how others feel about it [4]. While quality means meeting the demands and expectations of customers, excellence in business means exceptionality, exceeding the expectations of all stakeholders (employees, customers, society, etc.) in a global competitive environment [5]. Quality and excellence are concepts that cover the functioning of the organisation and its parts in the public and private sectors [6]. Today, we demand quality at every step and at every moment. We no longer understand it only as compliance with specific requirements, but as excellent performance that increases customer satisfaction [7].

According to Kern Pipan [5], excellence is not a theory. It is about the tangible achievements of what the organisation does and how it does it, the results achieved and the belief that it will sustainably achieve such results in the future. Instilling confidence in the sustainability of results also requires evidence that what the organisation does and how it does it is well-designed, systematic and constantly reviewed and improved [8]. According to Marolt and Gomišček [9], excellence can be defined as exceeding the average and finding the best possible, both in terms of customer satisfaction, resource efficiency, environmental protection and in terms of the organisation's business results. According to Bajc [10], excellence is not just a choice of one or another model. Excellence means a conscious decision to work perfectly every day and to do every, even the smallest step, as well as possible. The European Foundation for Quality Management (EFQM) in Brussels defines excellence as the excellent practice of managing an organisation and achieving results based on fundamental principles, such as [11]: results orientation, customer focus, leadership and stability of purpose, management based on processes and facts, employee involvement, continuous improvement and innovation, mutually beneficial partnerships and the social responsibility of the organisation.

When assessing organisations according to the EFQM excellence model, we consider the following fundamental principles of excellence [12]:


Let us take now a quick walk through the literature on the topic of business excellence in the last two decades with an emphasis on the EFQM Model. Here, we are particularly interested in the assessment and critical attitude of individual authors who have been engaged in research on this topic.2

Most companies have attempted a significant number or improvement initiatives such as total quality, re-engineering, restructuring and teams, with very mixed successes. According to Samson and Challis [13], in many cases these initiatives have been adopted without being part of an improvement strategy, but a part of a series of *ad hoc* decisions. The authors explored the deeper 'pre-conditions' that explain the variance in success of such improvement attempts and resulting performance changes. They illustrated a holistic management system and set of guiding principles that are common to the world's best companies. The system comprises closely connected elements of the integrated improvement strategy, action plans, performance management, external benchmarks and rewards for all employees. This approach to management is different in kind to the *ad hoc* approach, and executives can assess themselves against the system and the principles framework. An action plan can then be set up to permanently change the state of their company and achieve that improvement initiatives will work sustainably.

Rusjan [14] assessed the usefulness of the EFQM Excellence Model for decisionmaking on organisational improvement activities. He studied the procedures of the model in practice. He discussed some methodological issues related to the use of the EFQM model. These procedures are studied in order to analyse their appropriateness for identification of problematic situations (what is also the first stage of business analysis) and, based on that, for identification of problems. The author is critical in the sense that the model does not offer any specific guidelines regarding problem identification. Thus, the model offers no structured approach about how to exploit strengths or about how to classify or prioritise areas for improvement. He is concerned about the conceptual issue, about the clarification of the relationship between decision made on the basis of the EFQM model self-assessment results and other strategic, business, organisational, etc. decisions.

A group of researchers [15] used an integrative literature review methodology to explore the diversity of studies being conducted concerning the EFQM model. The results of their review indicate that the majority of papers are focused on too few research topics (e.g., performance measurement) with limited methodologies (e.g., case study).3

At the beginning of the previous decade, Asif et al. [16] explored the adequacy of business excellence models to address corporate sustainability, which is conceptualised in terms of economic, social and environmental bottom lines. They also investigated how organisations may manage corporate sustainability in the absence of a comprehensive sustainability management system standard. Thus, the EFQM excellence model and the Baldrige Criteria for Performance Excellence are analysed with regard to their considerations of sustainability. Their findings revealed that the models *per se* do not comprehensively address sustainability issues and economic prosperity remains a dominant consideration. They proposed an integrated quality-sustainability framework. Sustainability indicators, such as those provided in the Global Reporting

<sup>2</sup> Considering that two and a half years have passed since the adoption of the renewed model of business excellence (EFQM 2020), there are still not many articles that would provide a qualitative assessment of its usefulness and advantages compared to the previous model (EFQM 2013).

<sup>3</sup> This was also one of the reasons why the author as a many years' leading assessor decided to write this article focusing on the application of the business excellence model to a short case study from healthcare industry.

### *The EFQM Model as an Exquisite Tool for the Analysis of Business Excellence and Its Use in the… DOI: http://dx.doi.org/10.5772/intechopen.108471*

Initiative framework, could be integrated with core business processes using the structures and infrastructure provided by business excellence models.4

In their research, Asif et al. [17] discussed an interesting topic »service excellence".5 This issue is recognised as a means to delight customers, enhance coustomer loyalty and build long-term customer relationships. According to the authors, the existing service excellence models focus on the perspective of customers but fail to provide a systematic approach to implementation. The purpose of their study was to investigate what service excellence can learn from the business excellence models. Their study mutually compares the three most prominent models.6 The findings show that Johnston's model provides basic steps for achieving service excellence, while the EFQM and BCPE models can provide a systematic approach to service excellence implementation. The authors identified room for improvement in the current service excellence approaches.

Some Spanish researchers [18] investigated whether there is a specific approach to the adoption of best management practices embedded in the EFQM Excellence Model. They were interested in those practices within EFQM's enablers which predict high performance. They used the actual criteria and sub-criteria scores attained by organisations, which were assessed in the period from March 2011 to March 2013. The findings based on factor and regression analyses show that Spanish organisations adopt the best practices encompassing the EFQM model in a similar fashion: organisations on average follow parallel trends in the scores received per criterion, and there are no significant differences in the importance attributed to enablers. Their study contributes to the management literature on best practices, by highlighting a consistent trend in the use of the EFQM model, and also provides insights to managers on how to better allocate resources within Business Excellence Models.

In 2017, a Greek group of researchers [19] offered a descriptive analysis of TQM and business excellence measurement by synthesising the relevant literature. They made a thorough review. Their target was to advance a concrete understanding of relevant literature and to assess whether the temporal trends in business excellence measurement literature help position firms for the emerging business excellence context.7 The articles were classified and analysed according to business sector, framework used and methodology applied. The trends in each of the three axes and key research areas were proposed.

Ahn et al. [20] first introduced the EFQM model, which has facilitated the transformation towards an integral management approach, including openings to corporate social responsibility. The companies' ability to grow and to improve continuously is namely also determined by its social competences, ethical responsibility an environmental contributions. This shift of focus leads to a reorientation of the concept of business excellence. The authors emphasised that at first, quality management focused on the quality improvement of products and services, later on the processes providing these products and services. Quality was renamed into business excellence when corporations oriented themselves on the quality of the organisation and the chain (or network) in which it operates. Confronting with the present challenges, companies are beginning to focus on the quality of society while taking care of their core businesses.

Fonseca [21] analysed the EEQM 2020 Model, supported by a literature review and content analysis, to identify its theoretical foundations and the more relevant

<sup>4</sup> Sustainability has been adequately considered and included within the last revision of the EFQM model.

<sup>5</sup> This issue is especially relevant for this paper dealing with business excellence in the healthcare industry.

<sup>6</sup> Baldrige Criteria for Performance Excellence, EFQM model and Johnston's service excellence model.

<sup>7</sup> A total of 139 papers were identified from 39 refereed management journals published from 1990 to 2016.

novelties compared with the 2013 version. The EFQM 2020 Model is based on the link between an organisation's purpose and strategy, aligned with the United Nations Sustainable Development Goals, to simultaneously deliver performance and ensure transformation, creating enduring value for its key stakeholders and achieving remarkable results. The model adopts a strategic management lens and fits well in the Business Model description. The term excellence is no longer explicitly present, replaced by "outstanding« (the best it can be). Last but not least, the model is less prescriptive compared to the 2013 version and comprises seven criteria grouped in three dimensions.8 Nevertheless, on a theoretical level, several management theories support the EFQM 2020 Model. Although restricted to conceptual and theoretical analysis, his analysis can help academics and business leaders understand this novel model and support future empirical research.

In 1992, the EFQM Excellence Model was created to help organisations – regardless of size or sector – develop and implement their strategies to increase the competitiveness of European organisations. Since then, the model has adapted and evolved over time to reflect changes in the global market place. The 2020 model is the latest EFQM Excellence Model, and it has changed fundamentally since the previous (2013) one. The latest model has shifted from being a simple assessment tool to one that offers 'a framework and methodology to help with the changes, transformation and disruption that individuals and organisations face every day [22].

How about business excellence related to public and service sectors, like healthcare?<sup>9</sup> The traditional Business Excellence approach has been increasingly regarded as inward looking, inefficient and unable to drive appropriate actions for improvement in organisations, thus being of limited value for their stakeholders. This critical statement was made towards the end of the previous decade by Kanji [23], who set up an architecture of Business Excellence. This architecture deals with a set of systems, stakeholders, critical success factors and Structural Equation Modelling to create a holistic, reliable and comprehensive measurement model. The main advantage of the Global Excellence Measurement Systems is in providing integration and alignment among the various organisational subsystems and measures. Such integration comes from two main features. In his paper, the author first demonstrates the System Architecture of global excellence measurement system and then, with the help of empirical evidence from public and service sectors displays the integration and alignment among the various organisational subsystems and measures for the improvement of the organisation.

Naylor [24] was one among the first researchers who examined the appropriateness of the Business Excellence Model in developing a strategy for Bolton Hospitals NHS Trust to measure organisational performance. By utilising the conceptual framework, which consisted of the EFQM Model, it became evident that, although tools were in existence within Bolton Hospitals to measure organisational performance, several critical areas needed addressing. By addressing these key areas, the organisation could begin to work towards its goal of business excellence.

On the other hand, Jackson [25] described the inception of self-assessment and the EFQM Model. The author demonstrates how one clinical directorate in an NHS Trust used the principles of both to secure a culture of continuous improvement. The

<sup>8</sup> Direction (why), Execution (how), and Results (what), supported by 23 Criterion Parts and 2 Results Criterion, plus 112 guidance points, and the RADAR assessment tool.

<sup>9</sup> The author of this paper was also a leading assessor for one of the biggest clinical centres in Europe (two assessments in a row), for one big regional hospital and for one big Slovenian health insurance company.

### *The EFQM Model as an Exquisite Tool for the Analysis of Business Excellence and Its Use in the… DOI: http://dx.doi.org/10.5772/intechopen.108471*

journey from a mainly hieararchical, bureaucratic, individualist culture to one where the norms, values and beliefs reflected teamwork, involvement and empowerment is described. The highs, lows and learning points are all included, in an attempt to enlighten other healthcare organisations considering the benefits and pitfalls of using the business excellence model to improve the quality of their healthcare delivery.

At the turn of this century, defining quality of healthcare and determining how to improve organisational performance in developed countries was still an unresolved issue among healthcare professionals. However, given that it is an important area of responsibility and accountability, it is, according to Ruiz et al. [26], no longer acceptable to view the issue as discretionary. These authors advocate a thesis that an increasingly acceptable operative option for achieving continuous improvement and excellence seems to be the self-assessment of an organisation, based on the principles of knowledge management and total quality management. They provide an explanation of a two-level self-assessment approach for implementing TQM within the Spanish healthcare system. The first level integrates a client-centred approach using classical healthcare accreditation criteria along with ISO 9000 standards, the aim being to establish quality assurance systems in the whole organisation. The second level uses the EFQM Model as a road map for self-assessment and continuous improvement towards excellence.

### **2.1 A brief insight into the history of total quality management**

Total quality management shows that more developed countries began to systematically promote quality improvement already in the middle of the last century. In 1951, a national prize – the Deming Prize – was awarded for the first time in Japan. The award recognises the achievements of individuals and companies, and the award ceremony is also broadcast on national TV. A few decades later, in 1988, the United States established its national Malton Baldrige Award, which is the only American official award for promoting excellence in public and private organisations. Both awards have an established (self-)evaluation mechanism based on well-structured methodologies that contain quite demanding criteria. All three above mentioned awards are based on a prescribed protocol of systemic elements of assessment (structure of the award, weightings of individual criteria), the self-assessment of employees in the organisation, an external assessment using standardised criteria, a final value assessment, which is a measure of global business excellence, and a competitive comparison [5].

The greatest advantage of the model of business excellence is the Europe-wide comparable business evaluations, which deal with all key areas of management [27].

More than 25 national quality and excellence awards operate in Europe, based on the EFQM excellence model, the criteria and practice of the European Excellence Award (EEA). In the world, there are a total of more than 77 national awards for quality and business excellence in 69 countries [28].

### **2.2 The EFQM model**

Europe systematically promoted the competitive quality of its economy in 1989 with the establishment of The European Foundation for Quality Management. The European Business Excellence Model (EFQM model) was created by a large interdisciplinary group of experts from various sectors and academic institutions. The first version was presented in 1992 as a framework for evaluating applications for the European Quality Award. The first prize was also awarded at that time. In the modern VUCA era of Volatility, Uncertainty, Complexity and Ambiguity, the updated EFQM model was published in autumn 2020. It is mainly intended for the (self-)assessment of progress in transformations in all areas of operation. The model enables checking and comparing one's own policies, as well as implementation and results on a global scale, as this tool is used by more than 30,000 global organisations.

We cannot ignore the fact that various countries are also making progress by establishing their national awards for excellence. Awarding institutions are usually government departments, ministries or government-affiliated non-profit organisations.

By actively improving the entire business, this tool allows organisations to identify where they are on their journey of transformation, helps them identify gaps and learn about additional approaches to improve their own business compared with the world's greatest organisations. The 2020 model enables a more unified understanding of the links between approaches and results and between performance perception and business performance indicators. It helps organisations in strengthening the definition of purpose, strengthening the appropriate collaborative and inclusive culture, providing strong leadership, promoting agility and transformation in various areas of operation and providing databases and information for forecasting business trends.

The latest model has shifted from being a simple assessment tool to one that offers 'a framework and methodology to help with the changes, transformation, and disruption that individuals and organisations face every day' [3].

The 2020 EFQM Model (structured very differently from the 2013 one) is based on asking three questions: 'Why', 'How' and 'What'.


This drives the three key sections of the new framework, Direction, Execution and Results, as can be seen in **Figure 1**.

Each one of these is supported by two or three criteria – there are seven in total – each of which is supported by a series of guiding principles. The positioning statements for each criterion are set out below, not the full guiding principles:

### *2.2.1 Direction*

	- Organisational Culture is the specific collection of values & norms that are shared by people and groups within an organisation that influence, over time, the way they behave with each other and with Key Stakeholders outside the organisation.

*The EFQM Model as an Exquisite Tool for the Analysis of Business Excellence and Its Use in the… DOI: http://dx.doi.org/10.5772/intechopen.108471*

### **Figure 1.**

*The guiding principles that shaped the EFQM model ([3], p. 6). Source: EFQM ([3], p. 6).*

○ Organisational leadership relates to the organisation as a whole rather than any individual or team that provides direction from the top. It is about the organisation acting as a leader within its ecosystem, recognised by others as a role model, rather than from the traditional perspective of a top team managing the organisation.

### *2.2.2 Execution*


### *2.2.3 Results*

	- the ability to fulfil its Purpose, deliver the Strategy and Create Sustainable Value;
	- its fitness for the future.

The 2020 EFQM Model aims to give organisations the opportunity to take a holistic perspective and appreciate that each organisation is a complex but, at the same time, organised system.

### **3. Analysis of the organisation's operations based on the EFQM business excellence model**

The use of the business excellence model means a comprehensive systemic approach to management, as it basically enables a relatively objective analysis of the situation, the identification of weak areas in the organisation's operation and continuous improvement based on the information obtained [5].

When the organisation decides to apply for the call for national recognition10, it thereby, among other things, takes responsibility for preparing an application or its own assessment of business excellence according to the EFQM model. This work is basically an analysis of the business excellence of the organisation (self-assessment), which, as already mentioned, follows seven criteria (two for Direction, three for Execution and two for Results). The first five relate to enablers and the last two to outcomes – results. A large working group of professional employees of the organisation, responsible for individual areas, participates in the preparation of this self-assessment document. The subject of the analysis is basically the assessment of the organisation's operations through the prism of various aspects. It definitely involves a complex business analysis. The authors of the application, each considering an individual area (criterion), present the organisation or its operations in a specific area. Thus, for example, under sub-criterion Drive Innovation & Utilise Technology, the implementation of this strategy consists of presenting the organisation as it follows trends in the introduction of modern technologies of work and equipment. Technical experts in health organisation X (a clinical centre), which applied for the PRSPO tender, describe how new technologies contribute to better patient treatment, modern and less invasive treatment methods and, as a result, shorter treatment, lower hospitalisation rates and greater patient and employee safety. They support these claims with concrete facts, arguments where appropriate and, if necessary, with numbers. From these statements, external assessors then try to extract and meaningfully shape the

<sup>10</sup> PRSPO as an example of the national recognition or award of the Republic of Slovenia for Business Excellence.

### *The EFQM Model as an Exquisite Tool for the Analysis of Business Excellence and Its Use in the… DOI: http://dx.doi.org/10.5772/intechopen.108471*

advantages of the organisation in the chosen field. However, the process of assessing and analysing business excellence does not end there.

As we already mentioned in the introduction, the analysis of an organisation's operations, according to theory, goes through several phases. First, there is the phase of observing facts, then the phase of defining problems, the phase of setting hypotheses and finally, the phase of testing hypotheses, both logical and practical. If we map these phases onto the analysis of the organisation's business excellence, then the record of the organisation's strengths is the result of observing the facts in this organisation, and the identification of problems could be identified with the record of opportunities for improvement.

If the organisation is assessed and analysed according to the EFQM model, these opportunities for improvement will be recognised by the authors of the written assessment application of the organisation themselves. If it is assessed by external assessors, who are not burdened with the organisation's operations, the opportunities for improvement identified in the final report to the organisation/applicant can be more objective and aimed at solving the real problems of the organisation. For the organisation, the suggested opportunities for improvement are the right guidelines for improving operations in a specific area. On their basis, the organisation can prepare measures that, according to the theory of business analysis, are considered as setting hypotheses; checking these, we then arrive at a model or a concrete solution. According to Pučko [1], this second part is already the planning phase. Thus, the analysis of business excellence is essentially a process of analysis, i.e., monitoring and assessing the organisation, as we know it from business analysis as a traditional science. It is based on the EFQM model of business excellence, and the process itself begins with writing the organisation's assessment application document and continues with the work of external assessors, who first extract the organisation's advantages from the written application document and interviews conducted with the organisation's employees (this happens in the observation of facts phase) and then, by defining opportunities for improvement, indicate problematic situations or problematic positions of the organisation (this happens in the phase of defining the organisation's problems).

By identifying the problems present in the organisation's operations, the first part of the analysis of the organisation's operations is concluded. The business analysis process continues in the second part, where the organisation's management and its professional team prepare, based on the final report to the applicant prepared by the external assessors, a proposal for concrete measures to improve business in each area. It should be noted that external assessors can also be consultants to a certain extent, although this was not a case in the previous 2013 EFQM model; therefore, in their final report to the applicant, especially by identifying opportunities for improvement, they may advise the organisation and point out some feasible solutions. Of course, with a good and clear definition of opportunities for improvement, the organisation is already offered high-quality guidelines for action. Choosing and adopting appropriate measures, which form the basis of the proposed solutions to problems in individual areas, already means moving on from business analysis to business planning.

### **3.1 Analysis of the business excellence of an organisation from the point of view of enablers**

The Execution category contains three criteria. Each of them has several factors or enablers. Let us take only one example from the Engaging Stakeholders criterion: Partners & Suppliers. These are the external parties that the organisation chooses to work with to fulfil its Purpose, achieve its Vision, deliver its Strategy and reach shared objectives that benefit both parties [3].

Let us also take one example from the Creating Sustainable Value criterion: Deliver the Value. In practice, we find that an outstanding organisation implements effective and efficient ways to create value, making sure it can consistently deliver on its Purpose and value propositions, etc. [3].

As a matter of fact, there are plenty more enablers which have to be taken into account when assessing the business excellence of an organisation according to the EFQM model.

### **3.2 Analysis of the business excellence of an organisation from the point of view of results**

In this paper, we look at both criteria provided under the heading Results: 6) Stakeholder Perceptions and 7) Strategic and Operational Performance. Within the scope of the first one, we highlight only the sub-criterion Customer Perception Results. Thus, we are interested in what customer perceptions are about, for example, the overall experience of the customer, the culture of the organisation regarding the attitude and level of commitment to the client, the brand and reputation of the organisation, products, services and solutions, the use of innovations to improve processes, the use of technologies, etc. [3].

Within the scope of the second criterion, we focus only on Business Results. These indicators may include achieving purpose and creating sustainable value, financial results, meeting the expectations of key stakeholders, meeting strategic objectives, achievements in delivering transformations, predictive measures for the future, etc.

The definition of both criteria reads: excellent organisations achieve and permanently maintain exceptional results that satisfy or exceed the needs and expectations of their customers or their stakeholders.

For our example of the selected organisation X in the field of healthcare, we are also interested in its business performance. There are several indicators which help monitor, understand, predict and improve the likely business results of the organisation. These performance indicators can be: financial indicators, project costs, performance indicators of key processes, successful operation with partners and suppliers, technology, information and knowledge.

### **4. How to analyse and measure the business excellence of an organisation?**

The EFQM excellence model relies on the use of the RADAR matrix, which is a dynamic assessment framework and a powerful tool that provides a structured approach to investigating an organisation's performance. **Figure 2** illustrates this framework.

RADAR is the EFQM's diagnostic tool. The name RADAR derives from the belief that an organisation needs to:


*The EFQM Model as an Exquisite Tool for the Analysis of Business Excellence and Its Use in the… DOI: http://dx.doi.org/10.5772/intechopen.108471*

**Figure 2.** *RADAR matrix. Source: EFQM ([3], p. 39).*

• Assess and Refine the deployed approaches to learn and improve.

Organisations applying for EFQM recognition are scored out of 1000 points, which are divided across the seven criteria.

According to the EFQM excellence model [12], the RADAR logic generally states that the organisation must:


For the purpose of a good and reliable analysis, each element of the RADAR matrix is broken down into a series of attributes, as shown in **Tables 1**–**3**.

The applicant (that is, the organisation that participates in the PRSPO process for an individual year) prepares a written application. This is basically a special document, a presentation of the organisation according to all seven criteria. The authors of individual contents are professionals in the organisation with relevant knowledge and experience and competences.


### **Table 1.**

*Analysis of direction [3].*


### **Table 2.**

*Analysis of execution [3].*

### **4.1 How to analyse and evaluate business excellence organisations in the field of healthcare**

When we analyse business excellence in a chosen organisation, we rely primarily on the quality of its products or services. Thus, for the automotive industry, the number of ppm (the number of bad products per million of all manufactured products) will be a very important quality indicator, as will just-in-time deliveries (JIT)

*The EFQM Model as an Exquisite Tool for the Analysis of Business Excellence and Its Use in the… DOI: http://dx.doi.org/10.5772/intechopen.108471*


### **Table 3.** *Analysis of results [3].*

and excellent process control with the help of tools such as Six Sigma, FMEA analysis, R&D analysis, Control Plan, etc.

The business excellence of healthcare organisations can be analysed with a number of indicators, such as wait times, length of stay (number of days), number of less invasive interventions, number of safety complications (hospital infections, patient falls, etc.) [29].

The business excellence of healthcare organisations is manifested in particular through the quality of healthcare services. These can be described with quite a few attributes, but first we need to know well who the key stakeholders in the healthcare field are. These are medical staff, patients and health insurance companies – the payers of health services. All of them attribute different importance to individual attributes, which is why they also define the quality of healthcare services differently, as shown in **Table 4**.

If we want to illuminate the attributes shown above from the point of view of business excellence criterion 6, Customer Perception Results (in which case we connect with the clients to measure results), **Table 4** shows two groups that are to be taken into consideration when measuring satisfaction, namely patients and the payers of health services (in our case ZZZS, the Institute of Health Insurance of Slovenia).

Let us now take a look at the individual attributes that were defined many years ago by renowned experts, are still used today to define the quality of healthcare services and form the basis for the evaluation and measurement of the business excellence of healthcare organisations in the eyes of their customers (patients). The quality of technical achievements is related to the question of how well current scientific medical knowledge (expertise) and technology are used and exploited in given conditions. Usually, this quality, and thus the excellence of an organisation in the field, is


### **Table 4.**

*Stereotyped differences in the importance of the quality of health services to key stakeholders.*

assessed by the timeliness and accuracy of diagnosis, the appropriateness of therapy and the knowledge used in procedures and other medical interventions [31].

When managing interpersonal relationships, the patient is put in the foreground and needs to be treated safely, in a quality manner, efficiently and on time. The quality of interpersonal relationships depends on how well the clinician treats the patient on a human level. A good interpersonal relationship with the patient is established by the doctor taking an interest in the patient's concerns, reassuring the patient and encouraging positive thinking, rather than simply treating the patient [32]. The same applies to the nurses who receive and care for the patients.

The quality of treatment comfort and access to treatment is not defined and measured by what the clinician does during the treatment of the patient, but by the characteristics of the environment in which the clinician treats the patient, such as comfort, convenience and readiness and privacy [33, 34]. Comfort and access to treatment, such as a sufficiently large parking lot, appropriate signposts, comfortable waiting rooms, tasty hospital food, etc. are all direct values for patients. Comfort can contribute several direct benefits. For example, if the environment is pleasant and provides privacy and makes the patient feel relaxed, then it can significantly contribute to a faster and more accurate diagnosis. Access to treatment, i.e., how quickly the patient gets to the doctor and how often he can visit him in the clinic, is very important.

Although patient wishes and preferences have long been recognised as very important factors in achieving high-quality healthcare services, they have not been singled out as a factor in their own right until recently. In early definitions, responsiveness to patient preferences was only one of the factors determining the quality of the interpersonal relationship between patient and physician. On the contrary, responsiveness to the patient's wishes played a prominent role in how the relationship between doctor and patient was established in the form of economic agency theory [35]. According to this definition, the patient, who definitely lacks the necessary knowledge to understand the medical profession, turns to the doctor, who, of course, has this knowledge to act as the patient's agent. In this role, the doctor is expected to make appropriate treatment decisions on behalf of the patient, which the patient would otherwise have to make if he or she had the necessary specialist knowledge. To be a 'great agent', a physician must make decisions that are consistent with the patient's goals and wishes. Although in the past, this aspect of mediation theory had little real effect on how the quality of treatment was defined, the importance of responsiveness to the patient's wishes regarding the quality of treatment has now become increasingly recognised, for example, according to Donabedian [36] under the rubric 'acceptability' and according to the Institute of Health as 'respect for the patient's values, preferences and expressed needs' [37].

### *The EFQM Model as an Exquisite Tool for the Analysis of Business Excellence and Its Use in the… DOI: http://dx.doi.org/10.5772/intechopen.108471*

By efficiency, we mean how well resources are used/utilised to achieve the planned result. Efficiency always improves when the resources used to produce a given output decrease. Although economists usually (typically) treat efficiency and quality as separate concepts, today there are many arguments that support the thesis that separating them in healthcare is not easy or even meaningful. Because ineffective treatment consumes more resources than necessary, it is wasteful. Treatment that is wasteful is deficient, incomplete and therefore of inferior quality, no matter how good it is in other respects, or as Donabedian [30] puts it, 'wasteful treatment is either injurious to health or harmful to it because it prevents more beneficial treatment'.

The cost-effectiveness of a specific medical service, for example, a surgical intervention, can be defined by how much benefit such a medical intervention brings for a certain amount of expenditure, which is typically measured in improvements in health status. In general, as the amounts spent to provide services under certain conditions increase, returns begin to decline; each additional unit of expenditure yields diminishing benefits until a point is reached where no benefits flow from further increases in the inputs to treatment [38]. The idea that resources should be used to the limit as long as benefits are still flowing has been accepted as a 'maximalist aspect' of treatment quality. In this respect, the elements can be consumed as long as there are benefits, regardless of their size. As an alternative to this maximalist idea, the idea of the 'optimal aspect' developed, which states that spending should be stopped earlier, at the point when the additional benefits are too small to be worth the additional costs [30], known as the marginal principle of managerial economics.

### **4.2 The RADAR matrix: an underutilised but excellent analytical tool for improving processes and business performance**

Based on the author's many years of experience as a leading assessor (including in the healthcare industry), we can assert that when writing an assessment application document, applicants do not follow the RADAR matrix, which directs us to the following questions: Do the results derive from the measures? What is the spread of the approach and the breakdown of the results (deployment)? To what extent are the results verified and measured? For example: strategy implementation. What are the strategic goals and how does the organisation achieve them? With this, we can also determine the sustainable development of the organisation. The organisations, i.e., the applicants themselves, should pay close attention to this and provide as much evidence as possible, especially during the assessors' visit to the location.

Applicants do not write everything in their assessment application document (leaving the suggestion box empty, for example), while interviews with employees reveal that they can be very innovative, often proposing improvements through teamwork and interactive work. So, the real picture is much different. Therefore, facts and evidence found at the location must be taken into account when completing an assessment. Benchmarking is also a very common problem, so it is difficult to benchmark organisations.

If an organisation has implemented a modern computer-based information system (SAP, for instance), this does not necessarily mean that it is excellent in this area. It in fact remains questionable to what extent it knows how to use the information for the purpose of internal reporting to management or for the needs of decision-making at various levels in the organisation, for instance, as it pertains to the daily cash-flow, the up-to-date daily balance of receivables and liabilities by maturity (collection period), including by class maturities, when the organisation has available business results and

calculated key financial ratios for the previous month, and how the implementation of a certain measure is evaluated as an economic effect, as having an impact on the improvement of a certain indicator.

We would go beyond the permitted scope of this paper if we undertook a more detailed critical assessment of the current analysis and assessment of the business excellence of organisations using financial ratios. In general, in their written assessment applications, organisations showcase their business performance only according to a few simple indicators. The presentation of pure (nominal) accounting categories is otherwise the presentation of accurate numbers, but these do not have the expressive power to be convincing [39]. Thus, for example, it would be highly desirable if the authors of the application assessed the financial position of the organisation, which is defined by the Code of Business and Financial Principles [40] as the state of the organisation in relation to its past achievement of financial goals and in relation to the ability to achieve future goals. The presentation of the financial position is thus necessarily linked to information about the organisation's solvency from both the short-term and the long-term perspective. In terms of analysing and assessing organisational excellence, the long-term aspect is of course the most relevant.

There is insufficient emphasis on risk management, which relates to organisations being aware of the different types of risks and how to 'manage' them, say, investment risks. If the investment project is sound, the net present value (NPV) positive, and the organisation has the necessary competence and investment ability to implement the project in accordance with its budget, timeline and planned results, the investment risk has been managed well.

The owners' point of view is considered insufficiently. It would seem that the application should include interviews with representatives of the most important owners of the organisation. Today, value-based management theory, which is basically a relatively simple framework for setting goals that follow the increase of added value for owners, has already taken hold. Thus, according to this theory, one of the main factors influencing corporate value is the organisation's ability to generate returns that are greater than the cost of capital provided by the owners [41].

When it comes to the question of how to measure the excellence of an organisation from the perspective of the owners, we face several problems. According to Turk [4], differences in judgement may appear even among owners who have obtained their capital in different ways. Avoiding this issue in this paper, we could associate the excellence of an organisation with a greater growth in the market value of its shares than is common for others.

We should strive to make the EFQM model (using the RADAR matrix) increasingly objective; the approaches it involves should be clear, tangible and measurable, and applicants should take this into account when writing their assessment application document.

While visiting the applicants, it is often found that there is no real coordination between individual departments (purchasing, production, finance).

The collection of relevant data and information is extremely important for the analysis of business excellence, especially for criterion 7, Strategic & Operational Performance. According to Bergant [37], at least the following types of knowledge are necessary: knowledge of accounting data and financial statements, knowledge of handling data to calculate certain ratios and indicators (analysing), knowledge of an adequate and simple explanation of the ratios and indicators, and knowledge of information presentation and reporting (communication). Relevance and reliability are the key characteristics that any accounting information must possess if it is to be

### *The EFQM Model as an Exquisite Tool for the Analysis of Business Excellence and Its Use in the… DOI: http://dx.doi.org/10.5772/intechopen.108471*

useful. When we identify information as relevant and reliable, this information will be best presented to users in this way if it increases comparability and ensures that a rational and diligent user will be able to understand it [42]. Therefore, the expressive power and message value of indicators based on the quality of the organisation's operations are key to assessing the business excellence of the organisation. This issue is especially important when the authors of the assessment application document for the purpose of business excellence evaluation want to present the organisation according to its business results (Operational Performance).

Among all the aspects listed above, we cannot ignore the ethical one, especially if we highlight the social responsibility of the organisation, on which the model of business excellence is also built. A socially responsible organisation regulates its behaviour towards owners, employees, business partners, its narrower and wider social and business environment, and nature in accordance with the principles of sustainable behaviour [43]. In this framework, according to Bergant [43], we must also position the responsibility of management, which, among other things, is obliged to manage the risk of insolvency not only on the basis of professional principles, but also on the basis of ethical ones. Therefore, it would be necessary for the authors to upgrade their assessment application in the part that refers to criterion 7, Strategic & Operational Performance – for example, based on a model of the organisation's comprehensive financial policy, which is based on the organisation's capital adequacy as a starting point [43].

During the visit to the applicant's location, we often find that the processes are poorly managed, although everything is well defined in the ISO standards and in the applicant's internal documents (quality management), for example, which activities contribute to the creation of value and which do not (the ABC method, value analysis, etc.).

What methods, techniques, approaches (for example, the balanced scorecard system, BSC) are used by organisations to improve their business – we should be able to assess this with the RADAR matrix. In some organisations, they are very familiar with modern methods and techniques, but either do not use them enough or do not use them at all to improve their business activities. It is difficult to assess the extent to which they know how to use the most modern technologies, equipment, etc. It is one thing for them to openly say so and admit it; where this is not the case, if you are not an expert, it is difficult to assess.

### **5. Strengths and opportunities for improvement as the conclusion of business excellence analysis**

As already mentioned, writing the assessment application document in the process of applying for the business excellence award call for tender basically involves a comprehensive, complex analysis of the organisation's operations, in the preparation of which practically all of the organisation's functional staff participate. This process of analysing and assessing the organisation ends with a final report to the applicant, the authors of which are external assessors led by the leading assessor. This is certainly one of the most difficult tasks in business excellence analysis. It requires a certain mental effort from all the assessors, who are professionally trained in individual areas: assessor A is responsible for strategy, assessor B for leadership, assessor C for human resources (enablers and results), assessor D for resources and partnerships, assessor E for processes, assessor F for marketing and customers, assessor G for the area of

the social responsibility of the organisation and assessor H for business results. The assessing group therefore consists of different professional profiles.

The difficulty of writing the final report to the applicant lies primarily in identifying and creating meaningful opportunities for improvement, since it is in this part of the final report that the applicant expects useful suggestions from the assessors and their added value. These opportunities for improvement arise on the basis of the content written in the applicant's assessment application and on the basis of a threeday visit of the assessing group to the organisation, where a lot of data and information are collected, with the help of which, on the one hand, problems are identified (the first phase in business analysis), and on the other hand, by citing opportunities for improvement, appropriate solutions are offered (setting and logically testing the hypotheses), which are practically implemented by the organisation on the basis of taking concrete measures. Here, however, as already mentioned, the business analysis moves on to the planning phase for the organisation.

When business excellence assessors study the organisation's assessment application document and try to assess it according to this criterion, they first focus on the advantages that the organisation should have in the field under consideration. Their task is to identify and extract some key advantages according to which the organisation should be a role model for others, so that good practices in this area (knowledge sharing) can be transferred both internally to other organisational units as well as externally, more widely, to other business environments, to other business systems.

In order to present this aspect, which is also extremely important for the scoring itself (i.e., the final assessment of the organisation) to be more persuasive, let us first state one of the claims of the external assessors of organisation X, which is active in the field of healthcare (a clinical centre). The claim was made based on the prepared application document of the organisation and the assessors' visit to it as a priority in the draft of the final report to the applicant. It relates to criterion 7, Strategic & Operational Performance: *'In terms of the quality of medical services, the organisation ranks among the most successful medical institutions in Europe.'* This is an example of a poorly written advantage that sounds rather anecdotal and has a low indicative value. If what the assessors want to convey with this statement is true, then, of course, this is a really big advantage for both the healthcare organisation and the business system, which brings it a relatively high ranking in the overall scoring according to this criterion and in general. What is actually wrong with this statement? The assessors wrote it down on the basis of a broader interpretation of the results in the assessment application document and on the basis of the information they received from the management during the visit to the clinical centre. Both in the assessment application document and during the visit to the organisation, it was emphasised that the medical staff in this organisation is overburdened, that surgeons perform an inappropriately higher number of operations per year than their colleagues in comparable clinical centres in Central Europe, etc. However, the advantage in italics above is not formulated satisfactorily, as it is necessary to indicate the source of the information, as well as provide a precise definition of the indicator and a comparison with the average and the best healthcare organisations in Europe. It is necessary to know how many hospitals were compared and which of them are still among the most successful. What is needed is a real comparative analysis of the organisation according to this criterion, based on the method of rectifiers (benchmarking).

Thus, this would be an advantage that falls under the criterion Strategic & Operational Performance. Business performance indicators are much better written like this: *'In terms of the quality of medical services, the organisation is ranked among the*  *The EFQM Model as an Exquisite Tool for the Analysis of Business Excellence and Its Use in the… DOI: http://dx.doi.org/10.5772/intechopen.108471*

*most successful medical institutions in Europe, as it achieves better results than the average IQM hospital in most of the presented aspects of IQM quality medicine according to the methodology of the "international comparison of hospital mortality due to certain medical conditions and surgical interventions with the IQM hospital association".'* Since we have added an appropriate justification to the newly written advantages with the help of comparatively analysed indicators, we have obtained a fully reasoned claim, which can now also be better assessed according to the RADAR matrix. The organisation is able to prove that it is really that good according to this indicator.

### **Author details**

Vladimir Bukvič Faculty of Entrepreneurship, GEA College, Ljubljana, Slovenia

\*Address all correspondence to: vladimir.bukvic.ce@gmail.com

© 2022 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

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### **Chapter 6**

## The Dynamic Effects of Monetary Arrangements on Bilateral Trade in the African Franc Zone

*Dieudonné Mignamissi*

### **Abstract**

In this chapter, I estimate the dynamic effects of the sharing of the CFA franc on bilateral exports of member countries of the African Franc Zone (AFZ), distinguishing the results according to its two monetary unions, namely the Central African Economic and Monetary Community (CAEMC) and West African Economic and Monetary Union (WAEMU). While the overall and average effects are well identified in the recent literature, no study has focused on the dynamic effects of monetary integration in Africa. Using data from the World Bank, UNCTAD, and CEPII, I adopt a gravity specification estimated by ordinary least squares (OLS) and the Poisson pseudo-maximum likelihood (PPML) estimator. Our analysis leads to the following results: (i) in CAEMC, the dynamic effects of the CFA franc on bilateral trade of its member countries are delayed, as they are observed from 2010 onward; (ii) in WAEMU, the CFA franc has permanent dynamic effects throughout the study period; and (iii) these results, robust to the use of the PPML, are partially explained by the detour of trade caused by the fact that most of the partner countries belong to other regional groupings. All of these results call for a deep analysis of the future of the AFZ, which requires relevant reforms to ensure its viability and optimality.

**Keywords:** dynamic effects, common currency, bilateral trade, African Franc Zone, gravity model

### **1. Introduction**

This chapter contributes to the debate on the future of the Franc Zone by assessing the dynamic effects of monetary integration on the trade intensity of countries in this African space. Created in 1939 by France in order to preserve its political pre-square in the world on the eve of World War II, the Franc Zone can be understood as one of the oldest monetary zones in the world. It is made up of geopolitical zones where currencies that were once linked to the French Franc (former colonies or overseas territories) are used and have been linked to the Euro since 1999 by a fixed parity system guaranteed by the French Treasury. These currencies are the result of the monetary cooperation policy of the Banque de France and the Central Banks of the former colonies, which are bound by agreements. The Franc Zone is made up of France (and

its overseas territories), the countries of the Economic and Monetary Community of Central Africa—CAEMC (Cameroon, Congo, Central African Republic, Gabon, Equatorial Guinea, and Chad), the countries of the West African Economic and Monetary Union—WAEMU (Benin, Burkina Faso, Ivory Coast, Guinea Bissau, Niger, Mali, Senegal, and Togo), and the Comoros. These countries and groups of countries each use their own currencies.

A unique feature of both currency unions was the involvement of France as the anchor currency country in the monetary policy of the central banks of the WAEMU and CAEMC. France guaranteed the convertibility into their own currency and participated in the executive boards of the central banks with veto power and thus the ability to block any decisions until the adoption of the Euro. In fact, the CFA Franc Zones went beyond the features of a regular currency union. With the devaluation imposed by France in 1994, very similar rules of macroeconomic surveillance to those established in the EMU were introduced and gradually implemented. Nevertheless, while monetary integration is well established, economic integration is still incomplete in the WAEMU and CAEMC areas.

The need to study the effect of the CFA franc on trade in the countries of the African Franc Zone (AFZ) can be justified by the fact that this monetary zone is one of the oldest in the world. This issue has been mainly studied by referring to the Optimum Currency Area (OCA) criteria. However, those studies have been unable to draw clear-cut conclusions on the optimality of the CFA zone. This can be obviously linked to the limitations of the OCA framework in explaining the actual formation of monetary unions. The authorship of the work on the link between the single currency and market integration goes back to Rose [1]. In his analysis, the author demonstrates the explanatory power of the sharing of a single currency on bilateral trade. This path opened by Rose has generated a very fertile field of research. But in Africa, little attention has been paid to the link between the single currency and bilateral trade. However, some recent works confirm globally the existence of the endogenous effects of a single currency on bilateral trade [2, 3].

The major contribution of this paper is to consider the dynamic analysis of the effects of monetary integration on bilateral trade in the AFZ. Unlike previous approaches that focus on the average effect, I adopt an approach that allows this effect to be broken down over time. This makes it possible to identify the periods for which the common monetary history was an essential factor of market integration in the AFZ in order to constitute a rational memory for the future.

Following this introduction, the rest of the paper is organized as follow. Section 2 presents a brief literature review. Section 3 describes the methodology. Section 4 analyses the main findings. Section 5 addresses their sensitivity and Section 6 their robustness. In Section 7, I draw some concluding remarks.

### **2. Literature review**

### **2.1 The costs/benefits analysis**

According to Bean's [4] seminal analysis, joining or belonging to a monetary union is a decision resulting from an optimization of the related benefits and costs. Theoretically, the costs of a monetary union are assessed in terms of loss of national sovereignty, political independence, and cultural authenticity [5]. Furthermore, Belke and Wang [6] identify relative instability as another potential cost. In this regard,

### *The Dynamic Effects of Monetary Arrangements on Bilateral Trade in the African Franc Zone DOI: http://dx.doi.org/10.5772/intechopen.108393*

rebalancing and stabilization of production and the labor market become difficult to achieve due to the loss of control of the monetary instrument in the conduct of overall economic policy. The abandonment of exchange rate policy [7] and monetary policy as instruments of macroeconomic adjustment by a country exposes it to shocks whose magnitude is proportional to its degree of integration in the union, with the subsequent costs depending on the country's specific characteristics.

As for the benefits, they are diverse and varied, without claiming to be exhaustive. The direct benefits of a monetary union are related to the cancelation of exchange rate risk and the reduction of hedging costs against this risk [7]. Indirect benefits relate to the synchronization of cycles, which leads to a better response to macroeconomic shocks [8], but also to the intensification of trade [1]. Monetary union can also create a framework that is favorable to the mitigation of inflationary bias [9] and thus ensure price stability [10]. Adopting a typology specific to currency unions, Grubel [5] distinguishes between static gains in terms of reduced exchange costs, lower interest rates and exchange rate risk, and increased welfare and stability, and dynamic gains in terms of expanded trade, better labor market performance, and improved adjustment of economic structures.

### **2.2 Dynamic and scale effects**

According to Rose [1], there has been little work on the dynamic effects of currency unions on trade. They were interested in the nature of the link between the two variables, without addressing the question of the dynamics of this link over time. On the basis of this observation, Katayama and Melatos [11], using the panel dataset constructed by Glick and Rose [12] that covers 217 countries from 1948 to 1997, demonstrate the nonlinear impact of the single currency on bilateral trade. Thus, they show that, contrary to previous studies, the sharing of a single currency does not influence the level of bilateral trade in the same proportion. After him, De Sousa's [13] study, based on a theoretical gravity model covering a large period (1948–2009), proves that the effect of sharing a single currency on bilateral trade is eroding over time because of the existence of other channels that are commercial and financial globalization.

This result remains robust and confirmed by Miron et al. [14]. The authors restate the result of Rose [1] on the differentiated effects of sharing of single currency and the reduction in volatility of the exchange rate. Moreover, they confirm the hypothesis of the continuous declining effect of currency union on bilateral trade. According to Larch et al. [15], the monetary union effects on trade are dimensional and could be dynamic. Using a structural gravity model, the authors distinguish in the case of the euro zone, bilateral and multilateral effects. They discover that both effects are positive and statistically significant. Globally, this set of results remains consistent with that previously established by Bergin and Lin (2012).

### **3. Empirical strategy**

### **3.1 Model specification**

The empirical framework used in this chapter is the gravity model. This model is based on the Newtonian physics postulate that the force of attraction between two bodies is proportional to the product of their relative masses and inversely

proportional to the square of the distance between them. Although this model was introduced by Tinbergen [16], it is Anderson [17], and in particular Anderson and van Wincoop [18], who are responsible for its theoretical foundations, which have been the subject of considerable debate among economists. The analytical framework is a monopolistic model applied to international trade, i.e. a context that assumes increasing returns to scale and product differentiation. This framework is underpinned by three fundamental assumptions: profit maximization by firms in monopolistic competition, utility maximization by consumers, and specialization of the supply of goods between countries [19].

Empirically, the economic formulation of this equation is as follows:

$$X\_{\dot{\imath}t} = \phi\_0 \frac{Y\_{\dot{\imath}t}^{\phi\_1} \cdot Y\_{\dot{\jmath}t}^{\phi\_2}}{D\_{\dot{\imath}\dot{\jmath}}^{\phi\_3}} e^{\epsilon\_{\dot{\imath}t}} \tag{1}$$

*Xijt* is the bilateral trade flow between two countries in time t, *Yit* and *Yjt* are the GDPs, and *Dij* is the distance between the two countries. The *ϕ*' s are coefficients.

In light of Head and Mayer [19] who systematized the foundations and specifications of the gravity equation (naive form, structural form, and multiplicative form), I adopt the following multiplicative general form:

$$X\_{\rm ijt} = \phi\_0 Y\_{\rm it}^{\phi\_1} \cdot Y\_{\rm jt}^{\phi\_2} \theta\_{\rm ij}^{\chi} M\_{i(n)(j)} e^{\varepsilon\_{\rm yi}} \tag{2}$$

where *θij* is the common characteristics of *i* and *j*, and *M* is a proxy for multilateral resistances, which are generally captured by origin country fixed effects, destination country fixed effects, or by time fixed effects [20].

By explicitly noting the effect of sharing the single currency, I retain the following semi-log-linear specification:

$$\ln X\_{\bar{\text{j}}t} = \begin{Bmatrix} \phi\_0 + \phi\_1 \ln Y\_{\bar{\text{z}}} + \phi\_2 \ln Y\_{\bar{\text{z}}} + \phi\_3 \ln Pop\_{\bar{\text{z}}} + \phi\_4 \ln Pop\_{\bar{\text{z}}} \\ + \phi\_5 \ln Dist\_{\bar{\text{q}}} + \phi\_6 CFA\_{\bar{\text{q}}} + \phi\_7 Dun\_{\bar{\text{q}}} \end{Bmatrix} + \mu\_i + \chi\_j + \xi\_t + \varepsilon\_{\bar{\text{z}}t} \tag{3}$$

*CFAij* is the dummy variable equal to 1 if countries *i* and *j* belong simultaneously to the Franc Zone and its subregions (respectively *XAFij* for CAEMC, *XOFij* for WEAMU, and *CFAij* for the consolidated zone), and 0 otherwise. *Dumij* is the vector grouping the dummy variables related to the simultaneous openness to the sea (*Openij*), the sharing of a common language (*CLij*), the sharing of a common land border (*CBij*), and the sharing of a common colonizer (*CCij*). *μi*, *γj*, and *ξ<sup>t</sup>* are, respectively, exporter fixed effects, importer fixed effects, and time fixed effects, considered as proxies for multilateral resistances [21]. To avoid perfect multicollinearity between the bilateral dummy variables (*CFAij* and *Dumij*) and time-invariant variables like distance (*Dij*) with bilateral fixed effects, I decide to omit the latter by adopting the country and time fixed effects according to the specifications. *εijt* is the random term.

### **3.2 Estimation technique, data, and sample**

Gravity models can have two types of specifications, namely a linear specification typically using OLS and a nonlinear specification using multiple estimators. I will

*The Dynamic Effects of Monetary Arrangements on Bilateral Trade in the African Franc Zone DOI: http://dx.doi.org/10.5772/intechopen.108393*

initially, for preliminary results, apply OLS and for robustness apply a nonlinear approach, namely the Poisson pseudo-maximum likelihood (PPML) developed by Santos Silva and Tenreyro [22].

The data used come from three main sources, namely: UNCTAD, WDI, and CEPII. These data are observed over the period 1995–2019. Given the number of member countries (6 in CAEMC, 8 in WEAMU, and 14 in AFZ), the number of pairs per country (2400 pairs) and the number of partner countries (see sample of partner countries in the appendix), the number of observations is 14,400, 19,200, and 33,600, respectively, for CAEMC, WEAMU, and AFZ. The main characteristics of these data are shown in **Tables A1**–**A3** in the appendices.

The sample includes two types of countries (**Table A4** in appendices). The first is the reporting countries (country *i*), which are the member countries of CAEMC, WAEMU, and the AFZ. These countries are linked to partner countries (country *j*) that are part of several regional blocs in Africa and the world, namely SADC, AMU, EAC, EU, ASEAN+, MERCOSUR, and NAFTA.

### **4. Main findings**

The results show that in CAEMC (see **Table 1**), the overall and average effect of the CFA is significant<sup>1</sup> . However, by adopting a dynamic analysis, several salient facts emerge. Indeed, between 1995 and 2010, although the effect associated with the sharing of the single currency by the member countries of this community space is positive overall, it remains insignificant. This result reflects the fact that the CFAF did not generate the economies of scale and dynamic gains expected. Between 2011 and


<sup>1</sup> In relation to the comments, he noted that the results were generated for each year between 1995 and 2019. They have not been reported in full to fit the format of the book. However, they are available upon request


*Robust standard errors in parentheses.*

## *\*\*\*p <sup>&</sup>lt; 0.01. \*\*p <sup>&</sup>lt; 0.05. \**

*p < 0.1. Source: Author.*

### **Table 1.**

*Baseline results of dynamic effects in the CAEMC.*

2019, there is a positive impact from the sharing of the single currency in CAEMC. This analysis shows that in CAEMC, the positive effect of the single currency was delayed, with countries experiencing dynamic losses for over more than a decade. These results are discussed in general by Mignamissi [3].

In the WAEMU (see **Table 2**), on the other hand, not only is the average and overall effect perceptible but also the dynamic effects are significant. In other words, the sharing of the single currency has distributive effects over time, indicating the existence of dynamic gains in this region. Moreover, the results obtained in this region can be qualified, as the significant effect is derisory in view of the low share of intra-regional trade in this area, which has barely exceeded 10% for several decades.

From these results, discussing the future of the AFZ presents itself as a highly interesting opportunity. Such a debate could be structured around two main arguments, one political and the other economic. On the political level, the pressures generated by the desire of the WEAMU countries to enter into a new monetary union with the other ECOWAS countries have shifted the positions. This desire also revived recurrent internal debates which founded the legitimate aspiration of the populations of the Franc zone to choose their own economic destiny in general. On the economic level, one could point out the questionable effects of the mechanisms of the Franc


*The Dynamic Effects of Monetary Arrangements on Bilateral Trade in the African Franc Zone DOI: http://dx.doi.org/10.5772/intechopen.108393*

*Robust standard errors in parentheses.*

*\*\*\*p <sup>&</sup>lt; 0.01. \*\*p <sup>&</sup>lt; 0.05. \**

*p < 0.1.*

### *Source: Author.*

### **Table 2.**

*Baseline results of dynamic effects in the WEAMU.*

Zone. To this end, it is relevant to question deeply the relevance of the agreements and operating principles of the Franc Zone (guaranteed convertibility, fixed parities, free transferability, and centralization of foreign reserves), the rate of economic cycle's synchronization of the member countries, and the convergence speed of nominal and real indicators, among others.

As for the control variables, I distinguish two cases, namely the case of traditional quantitative variables and the case of bilateral dummies. Our results show that GDP, population, and distance between two countries support the intuition of gravity modeling. While GDP and population act as attractors to bilateral trade, distance acts as a repellent to trade between two countries. In other words, GDP and population are proxies for market size, which is a factor driving bilateral trade when this size reaches a critical level in the partner countries. Moreover, the further apart two countries are, the less they trade, because of the multiplication of transaction costs, especially transport costs. This result is fundamental to all gravity models.

Finally, the sharing of certain historical (common colonizer), geographical (openness to the sea and land border), and cultural (language) characteristics is favorable to market integration. The coefficients associated with the dummies that capture them are in most specifications positive and significant. Indeed, these variables not only help to reduce transaction costs but also strengthen the social and historical ties between peoples, which would be favorable to the mixing of populations and the intensification of exchanges between them.

### **5. Sensitivity analysis: the effects of partners' regions on bilateral trade**

The idea of this test is to see if any of the factors limiting bilateral trade in the AFZ have external origins. To do so, I model through dummies the effect of the membership of partner countries outside the AFZ in their respective communities. I thus capture the effect of partner countries' membership in the Southern African Development Community (SADC), in the Arab Maghreb Union (AMU), in the East African Community (EAC), in the European Union (EU), in the Association of Southeast Asian Nations (ASEAN), in the Mercado Común del Sur (MERCOSUR), and in the North American Free Trade Agreement (NAFTA). By augmenting the gravity model with dummies capturing membership in these integration spaces, two types of results emerge.

In the CAEMC, countries' membership in the African regional economic communities (RECs) (SADC, UMA, and AEC) reduces the bilateral trade (**Table 3**). In other words, countries outside the AFZ contribute to the detour of trade flows within the AFZ member countries. This detour effect is more pronounced in the SADC and EAC. This result could be justified by the multiple memberships of Central African countries in the broader sense of ECCAS in several regional economic communities (RECs). The coexistence of several communities (CEN-SAD2 , CAEMC, ECCAS3 , ECGLC4 , and EAC) in the same integration space, sometimes with similar objectives, results in a waste of resources, which is a brake on integration through the market. Also, the dynamic analysis of these effects shows that they are decreasing for SADC and UMA, but increasing for EAC. This shows a desire for faster commercial integration with the first two mentioned. On the other hand, the membership of CAEMC partner countries in regional economic communities outside Africa (EU, MERCOSUR, ASEAN, and NAFTA) seems beneficial to their trade. Indeed, because of their low level of diversification and product sophistication, CAEMC countries have difficulty gaining consistent market shares in these communities, which tends to amount to an illusory increase in their bilateral trade. Here, the effect of

<sup>2</sup> Community of Sahel–Saharan States.

<sup>3</sup> Economic Community of Central African States.

<sup>4</sup> Economic Community of the Great Lakes Countries.


*The Dynamic Effects of Monetary Arrangements on Bilateral Trade in the African Franc Zone DOI: http://dx.doi.org/10.5772/intechopen.108393*

*Robust standard errors in parentheses.*

*\*\*p <sup>&</sup>lt; 0.01. \**

*p < 0.05.*

*Source: Author.*

### **Table 3.**

*Dynamic effects in CAEMC (augmented gravity model).*



*Robust standard errors in parentheses.*

*\*\*\*p <sup>&</sup>lt; 0.01. \*\*p <sup>&</sup>lt; 0.05. \**

*p < 0.1.*

*Source: Author.*

### **Table 4.**

*Dynamic effects in WEAMU (augmented gravity model).*

creation of trade flows weakens for the EU and NAFTA but consolidates for ASEAN, in particular over the last 7 years.

In WAEMU, only AMU member countries seem to create a diversion effect, the creation effects being globally observed with the rest of the regional economic communities (**Table 4**). In dynamic analysis, I note a high and permanent effect over the entire study period for ASEAN, which is the opposite in NAFTA. The EU has a weak creation effect, noted between 1999 and 2003 according to our estimates.

These controversial results call for debate on the nature of monetary integration in the AFZ, as well as its potential economic effects. Mignamissi's [3] contribution to this debate is more empirical than analytical. The author evaluates the monetary costs/ benefits of market integration in the Franc Zone. He defines, starting from the status quo, four scenarios (Cooperation, Aggregation, Consolidation, and Enlargement). Based on an augmented gravity model, he identifies costs and shows that the best scenario for CAEMC is consolidation and for WAEMU is cooperation. In general, this analysis corroborates those of Allechi and Niamkey [23], Masson and Pattillo [24], Beetsma and Giuliodori [25], and Carrere [26].

### **6. Robustness**

Santos Silva and Tenreyro [22, 27] show that the specification in log-linear form of the gravity model yields biased estimators due to the heteroscedasticity of trade levels. The authors also show that the PPML estimator is more efficient than the nonlinear least squares estimator when trade is specified in levels. They also point out that to ensure the consistency of the Poisson estimator of the PPML, the data do not necessarily have to follow a Poisson distribution.<sup>5</sup> This estimator corrects three main biases: (*i*) a bias induced by the log transformation, (*ii*) a bias due to heteroscedasticity, and (*iii*) a bias due to the presence of zeros in the dependent variable.

<sup>5</sup> For this reason, the literature calls it a pseudo-maximum likelihood and not the Maximum Likelihood estimator.

*The Dynamic Effects of Monetary Arrangements on Bilateral Trade in the African Franc Zone DOI: http://dx.doi.org/10.5772/intechopen.108393*

Applying the Poisson specification to the gravity model [28], I obtain

$$\Pr\left(T\_{\vec{\eta}} = \mathsf{C} | \mathsf{x}\_{\vec{\eta}}\right) = \frac{e^{-\mu\left(\mathsf{x}\_{\vec{\eta}}\beta\right)}\mu\left(\mathsf{x}\_{\vec{\eta}}\beta\right)^{\mathrm{Com}\_{\vec{\eta}}}}{\binom{T\_{\vec{\eta}}}{\left(\mathsf{T}\_{\vec{\eta}}\right)!}}\tag{4}$$

where *Tij* ¼ 0,1,2, … with *Tij*! the factorial of bilateral trade. The Poisson model stipulates an egalitarian dispersion and the conditional variance of*Tij* is equal to its mean *μ xijβ* � �.

Solving the first-order conditions of the log-likelihood of the above expression, I obtain

$$\hat{\boldsymbol{\beta}}\_{\text{Poisson}} = \text{Arg}\text{Max}\_{\boldsymbol{\beta}} \left\{ \sum\_{i=1}^{N} \sum\_{j=1}^{N} \left[ -e^{\left(\mathbf{x}\_{i}\boldsymbol{\beta}\right)} + \text{Corm}\_{\vec{\eta}}(\mathbf{x}\_{i\vec{\eta}}\boldsymbol{\beta}) - \text{Log}\left(\mathbf{Com}\_{\vec{\eta}}\right)! \right] \right\} \tag{5}$$

In the presence of heteroscedasticity, this estimator is consistent and more efficient than the previously developed estimators of the gravity model. Finally, because of its multiplicative form, the Poisson estimator offers a natural technique for handling zeros in the dependent variable.

The estimable form of the model is as follows:

$$X\_{\vec{\eta}\vec{t}} = \text{Exp}\left\{ \begin{array}{c} \ln \phi\_0 + \phi\_1 \ln \mathcal{Y}\_{\vec{\imath}t} + \phi\_2 \ln \mathcal{Y}\_{\vec{\jmath}t} + \phi\_3 \ln \text{Pop}\_{\vec{\imath}t} \\ + \phi\_4 \ln \text{Pop}\_{\vec{\jmath}t} + \phi\_5 \ln \text{Dist}\_{\vec{\imath}\vec{\jmath}} + \phi\_6 \text{CFA}\_{\vec{\imath}\vec{\jmath}} + \phi\_7 \text{Dummy}\_{\vec{\imath}\vec{\jmath}} \end{array} \right\} \text{Exp}\left(\mu\_i + \gamma\_j + \xi\_t + \varepsilon\_{\vec{\imath}t}\right) \tag{6}$$

The results of this robustness test confirm the previously established results (See **Tables 5** and **6**). While in the CAEMC the dynamic effects of the CFA franc on bilateral trade between member countries are delayed, in the WAEMU the dynamic effect is positive, permanent, and significant over the entire study period. Moreover, the analysis confirms that in comparative statistics, the effect of certain years is greater than the overall effect. In other words, the overall average cumulative effect suffers from the specific economic conditions associated with the various events and crises that the region has experienced. This analysis reflects the fact that dynamic gains, when they exist, are not uniformly distributed over time.


*Robust standard errors in parentheses.*

*\*\*\*p <sup>&</sup>lt; 0.01. \*\*p <sup>&</sup>lt; 0.05. \**

*p < 0.1.*

*Source: Author.*

**Table 5.** *PPML estimates in CAEMC.*


*Robust standard errors in parentheses.*

*\*\*p <sup>&</sup>lt; 0.01. \* p < 0.05.*

*Source: Author.*

**Table 6.** *PPML estimates in WEAMU.*

### **7. Concluding remarks**

The AFZ has historically been considered one of the oldest currency areas in the world. However, the external economic effects of this currency grouping have rarely been shown to be conclusive. First, the operating principles of the AFZ, such as the fixed exchange rate regime and the centralization of foreign exchange reserves in the French Treasury, are widely debated. Second, the sharing of the CFA franc has not always ensured the synchronization of member countries' cycles, as countries have experienced asymmetric reactions to exogenous shocks (financial crisis, hunger crisis, oil crisis, and COVID 19). This asymmetry in reaction to exogenous shocks slows down the speed of convergence of nominal and real macroeconomic indicators.

Specifically, the macroeconomic effects of the CFA franc on the bilateral trade of AFZ member countries have not been well documented. Thus, the few recent studies [2, 3] take a global approach by estimating an average effect over the study period. The specificity of this chapter is to adopt a dynamic approach by estimating for each year the marginal effect of the CFA franc between 1995 and 2019. Using ordinary least squares and the Poisson pseudo-maximum likelihood estimator, I obtain different results in the two currency unions of the AFZ. In the CAEMC, the dynamic effects of sharing the CFA franc are delayed and begin to be noticeable from the early 2010s. In contrast, the dynamic effects of the CFA franc in the WAEMU are permanent over the entire study period. However, these different effects must be contrasted with the low effective share of intra-zone trade.

Some lessons can be learned from the results obtained. While there is no perfect monetary structure or exchange rate that is good all the time for a country, a profound reflection on the future of the franc zone must be conducted. Moreover, decisive steps have already been taken within WAEMU with the project to create a single currency in ECOWAS, although this has been delayed compared to the initial deadlines. In CAEMC, the project to rationalize with ECCAS is already in place. A High Monetary Authority responsible for setting up a Monetary Union and a Central Bank in the Union/Community through the monitoring of macroeconomic convergence as well as the harmonization of monetary, banking, and financial policies has recently been created. These dynamics are in line with the African Union's desire to eventually move to a single currency on the scale of the continent from the various subregional currencies. This

*The Dynamic Effects of Monetary Arrangements on Bilateral Trade in the African Franc Zone DOI: http://dx.doi.org/10.5772/intechopen.108393*

desire is affirmed by the implementation of the African continental free trade area, which is one of the preliminary steps toward the feasibility of a single currency with proven dynamic potential effects, enhanced tenfold by a large-scale integration zone.


### **A. Appendices**

*Source: Author.*

### **Table A1.**

*Descriptive statistics.*


### **Table A2.**

*Full correlation matrix (CAEMC).*


### **Table A3.**

*Full correlation matrix (WEAMU).*


### **Table A4.** *Sample.*

### **Author details**

Dieudonné Mignamissi Faculty of Economics, University of Yaoundé II, Cameroon

\*Address all correspondence to: mignamissid@yahoo.fr

© 2023 The Author(s). Licensee IntechOpen. This chapter is distributed under the terms of the Creative Commons Attribution License (http://creativecommons.org/licenses/by/3.0), which permits unrestricted use, distribution, and reproduction in any medium, provided the original work is properly cited.

*The Dynamic Effects of Monetary Arrangements on Bilateral Trade in the African Franc Zone DOI: http://dx.doi.org/10.5772/intechopen.108393*

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